Introduction The accounts of the joint stock companies are required to be compulsory audited under Companies Act, 2013. An external auditor is appointed to give his fair opinion on the financial statements prepared by the management, to the share holders and to all those who will rely on the financial statements. case of a company the ownership and the management vest in different persons. The shareholders, who are the owners of the company, have no right to take part in the management of the business. The affairs of joint stock companies are managed by directors. To ensure that the money invested by the shareholders are managed properly, therefore the audit is mandatory /compulsory under the Companies Act for all types of companies, whether public or private.Appointment of Company Auditor Section 139 of the Companies Act,2013, contains the relevant provisions regarding the appointment of an auditor(s) of unlisted as well as listed company to which companies (Audit and Auditors) Rules 2014 apply. |. Appointment of First Auditor of a Company (Other than a Government Company): i According to section 139 (6) of the Companies Act,2013, the first auditor of a company shall be appointed by the Board of Directors within 30 days of the date of the registration of the company. ii If the Board fails to appoint such auditor, it shall inform the members of the company then the members of the company shall appoint the auditor within 90 days at the Extraordinary General Meeting (EGM) of the shareholders of the company. Such auditor shall hold office till the conclusion of I‘ Annual General Meeting.2 Appointment of Auditor other than First Auditor: Section 139 (I) of the Companies Act, 2013 provides that every company (except Government Company) shall appoint an individual or a firm or Limited Liability Partnership (LLP) as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting . Hence in companies ( except Government Companies) an auditor or firm of auditors is appointed for five years at a time.And thereafter till the conclusion of every sixth meeting. Im int to be 5 1. Ratification of appointment of auditor/ firm of auditors shall be done by the members at every Annual General Meeting [Section 139 (1)]. i. Written consent of the auditor/ firm of auditors for such appointment shall be obtained from him or the firm whether the auditor/ firm of auditors satisfies criteria provided in section 141 of Companies Act,2013 regarding eligibility, qualifications and disqualifications.i, Before such appointment is made auditor/ firm has to give a certificate in writing that the appointment or reappointment, if made shall be in accordance with the prescribed conditions. Such as eligible for appointment and not disqualified for appointment under the Companies Act,2013, the Chartered Accountants Act,1949 and the rules made there under. Also no case of professional misconduct is pending. lv. The company shall file a notice about appointment or re-appointment to the Registrar of Companies within 15 days of the meeting in which auditor was appointed and shall inform the concerned auditor/ firm accordingly [Rule 11 (2) Companies (Audit and Auditors) Rules 2014 apply.~~ 3. Appointment of auditor in case of Casual Vacancy [Section 139(8)] : The Companies Act has not defined casual vacancy. But one can say that casual vacancy for an auditor arises due to disqualification, resignation, death etc. i. If the casual vacancy arises on account of resignation of the auditor or firm of auditors the vacancy shall only be filled by the company within three months on the recommendation of the Board of Directors [Section 139(8) of the Companies Act,2013]. i. If a casual vacancy arises due to any other reason (death, disqualification, insanity or insolvency ) it may be filled by the Board of Directors within 30 days.ii. Where there are more than one auditor, the remaining auditor may act as the auditor during the vacancy period. iv. An auditor appointed to fill up casual vacancy shall hold office until the conclusion of the next Annual General Meeting (AGM) of the company. 4. Appointment of auditor by Central Government [Section 139 (3)] : The Central Government may appoint an auditor in the following situations. i Where no auditor is appointed or reappointed in an Annual General Meeting. ii, | Where the auditor is appointed to contravention to the provisions of the Companies Act.ii, Where a special resolution is required for appointment of auditor(s), and the company fails to pass such resolution at the time of appointment. iv. Where the auditor appointed at the AGM has not accepted the appointment. The Company should apply to the Central Government along with the list of names of the auditors, whom the company suggests for appointment of auditor. The Central Government after due consideration, appoints the auditor.5. Appointment of Auditor in Government Company : Auditor of a Government company shall be appointed or re-appointed by the Comptroller and Auditor-General (CAG) of India. According to Section 130 (7),a Government Company is one in which the Central Government or any State Government or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary of a Government company, and Government Company or any Government Corporation, hold either singly of jointly not less than 51% of the paid share capital.Appointment of First Auditor shall be made by the Comptroller and Auditor- General (CAG) of India within 60 days of the registration of the company. In case the CAG of India does not appoint the auditor within 60 days as stated above, the Board of Directors of the company shall appoint such auditor within next 30 days. If the Board also fails to make an appointment of the auditor/ firm of auditors, then members will appoint the auditor in Extraordinary General Meeting (EGM) within 60 days. company will inform the auditor then he shall hold office till the conclusion of the first AGM. Subsequent appointment of the auditor shall be made within 180 days from the commencement of the financial year.Such auditor(s) will continue to hold office till the conclusion of the next Annual General Meeting (AGM). The company will inform the auditor then he shall hold office till the conclusion of the next AGM. In case of Government Companies, the first auditor or firm of auditors is appointed till the conclusion of first AGM and in case of subsequent auditor appointment is made for only one year and not for five years. In case of Government Companies, the casual vacancy of the auditor is to be filled by the CAG of India within 30 days. If the vacancy is not filled within 30 days, then it can be filled by the Board of Directors within next 30 days [Section |39 (8) of the Companies Act, 2013.]“ ~~ The casual vacancy should arise because the auditor has become disqualified after his appointment or due to his death or some other person reason. The tenure of auditor appointed during the casual period would be till the conclusion of next AGM. 6. Appointment of auditor by Special Resolution : In case of Companies mentioned below, appointment and reappointment of auditor(s) at the Annual General Meeting (AGM) shall be made after passing a special resolution. i. A company in which not less than 25% of the subscribed share capital is held as on the date of Annual General Meeting, jointly or singly by: a) A Nationalized Bank or the General Insurance Company, orb) Any institution, financial or otherwise, established Under State or Provincial Act in which not less than 51% of the subscribed capital is held by the State Government, or <) A Central Government or a State Government or a Government Company or a Public Financial Institution. Here , the following points are to be noted: = Subscribed share capital includes preference share capital. = Special resolution for appointment of auditor is necessary even if a nationalized bank holds the shares of the company in its name as security for loans advanced by it.= Ifany of the above mentioned companies fails to appoint the auditor by passing a special resolution in its AGM, the Central Government has the power to appoint the auditor of the company. The Public Finance institutions means: » Any institution constituted under any Central Act, or » The institution in which not less than 51% of the paid up share capital is held or controlled by the Central Government. » The official gazette of the Central Government mentioning the names of the public financial institutions.Qualifications of Auditor Section 141 of the Companies Act, 2013 prescribes the qualifications and disqualifications of the Company auditor(s). According to Section 141 (2) of the Act, |. Only a qualified Chartered Accountant within the meaning of Chartered Accountants Act, 1949 can be appointed as an auditor of the company. If the Chartered Accountant is holding a certificate of practice, and practicing in his individual capacity, he may be appointed as an auditor only as an individual.2. It is further provided a Partnership Firm, whereof majority of the partners practicing in India are qualified for appointment as the auditor, may be appointed by its firm name to be the auditor of a company. In such a case, any partner so practicing may act in the name of the firm. 3. Limited Liability Partnership (LLP) firm can be appointed as auditor of the company but only Chartered Accountant Partners are authorized to act and sign on behalf of the firm.Disqualifications of Auditor According to Section 141 (3) of the Companies Act, 2013, the following persons are not qualified for appointment as auditor of a company. |. The auditing service is considered to be personal, therefore a body corporate (other than a Limited Liability Partnership (LLP) registered under Limited Liability Partnership Act, 2008) cannot be appointed as auditor. This also ensures that the liability of the auditor does not become limited. 2. An officer or employee of the company as per the Section 2 (59) of the Companies Act, 2013. The term officer includes Director, Manager, and Key Managerial Personnel. 3. A person who is indebted to the company in excess of Rs. Five lakh.A person who has given guarantee or security to the company in relation in the indebtedness of any third person for a sum exceeding Rs, one lakh. A person holding any security of the company carrying a voting right cannot be appointed as auditor. This provision came into effect since December 2001. Any person where appoint will result in the person being auditor of more than 20 companies. ( i.e. ceiling limit according to Section 139 of the Companies Act, 2013.) A person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction.Section 144 of the Companies Act, 2013 also prescribes certain services ( not to be rendered by the auditor without the approval of the Board of Directors or the audit committee ) but which shall not include the following services: Accounting and book keeping services, Internal audit , Investment advisory services and banking services, Management services, Designing and implementing any financial information system, Any other kind of of services as may be prescribed, Rendering of out sourced financial services, Actuarial science services.A Removal of Auditor ~The Companies Act ensures that the independence of the auditor is safeguarded always. [A] Removal of Auditor(s) Before the Expiry of the Term: |. An auditor appointed under section 139, can be removed from his office before the expiry of his term only by a special resolution of the company after obtaining the prior approval of the Central Government in this behalf as per Rule 7 of the Companies Audit and Auditors Rules (CAAR) 2014, 2. Application can be made to Central Government for removal in Form ADT-2 with the fees provided for the purpose within 30 days of the resolution passed by the Board.3. After the receipt of the approval of the Central Government, the general meeting shall be held within 60 days of the approval. 4. Special resolution is required to be passed in the general meeting for removal of the auditor----- [The Companies Audit and Auditors Rules 7(CAAR), 2014.] 5. It is important to note that the removal of auditor before the expiry of the term, the auditor concerned shall be given reasonable opportunity to be heard in the general meeting----- rule of natural justice. It should be noted that even for the re-appointment of a retiring auditor, is not automatic, the passing of resolution in the annual general meeting for his appointment is essential.[B] Removal of Auditor(s) After the Expiry of the Term: If the company decides not to reappoint the existing auditor, the following procedure is to be followed. 1. Special notice: The shareholder who intends to remove the auditor, shall give 14 days’ notice (special notice) to the company, informing his intension to remove the auditor by passing the resolution in general meeting. 2. Communication to the retiring auditor: The company on receipt of such notice, should send a copy to the retiring auditor. 3. Representation by retiring auditor: The retiring auditor can made a written representation, not exceeding a reasonable length, to the --Prams Company regarding his proposed removal. He may also request the company to circulate his representation to the members. The company is required to send the representation to the shareholders only if the representation is made by the auditor within a reasonable time. 4. Representation to be read: If the representation is not circulated to the shareholders, the auditor may require that his representation be read out in the general meeting. 5. Right to attend the meeting: The auditor who is proposed to be removed has an inherent right to attend the general meeting. He can also make oral statement at the meeting as to his proposed removal. 6. Not to abuse the right : The above privileges are extended to the auditor to protect his independence and prevent his unjust removal.Rights / Powers of Auditors Ko Powers! Rights of Auditors: The Company Act has given certain powers/ rights to an auditor (i.e. statutory auditor) to enable him to carry out the auditing of the books of account independently and perform his work effectively. The various powers/rights of an auditor(s) are mentioned below: 1. Right to access books, accounts and vouchers [Section 143 (1) of the companies Act, 2013] : An auditor has absolute right to inspect all the books, accounts and supporting documents which give evidence for any of the transaction of the company. Here the term ‘Books’ includes financial records, cost statements, statutory report and statistical records. ‘Vouchers’ include all documents, agreements and correspondence and containing evidences in respect of business transactions. At any time during his tenure as an auditor, he may have access to all above the records.2 Right to obtain information and explanations [Section 143 (1): Every auditor of a company has the right to ask any information and explanations from the directors and officers of the company which he may think necessary for the perform of his work. It is obligatory for the officers of the company to furnish without delay the relevant information to the auditor. If he does not get the information asked for, the auditor should mention that in his report.3. Right to visit branches [Section 143 (2) ]: A company auditor is entitled to visit branch offices and also has a right to inspect all the books and vouchers of the branch office. This right is extended to the company auditor even when the accounts of the branch offices are audited by the another person. If the company is a banking company and the branch is situated outside India, the company auditor(s) will have access to the copies or extracts of the books and other documents sent/ transmitted to the main office of the company in India.4. Right to make representation [Section 140]: The retiring auditor is entitled to receive a copy of the special notice intending to remove him or proposing to appoint any other person as auditor. Further, the retiring auditor sought to be removed has a right to make his representation in writing and request that the same be circulated amongst the members of the company. In case, the same could not be circulated, the auditor may require that the representation shall be read out at the general meeting.5. Right to report to members [ Section 143(2) ] : The auditor has right as well as duty to make a report to the members on the accounts examined by him. Further to state that whether in his opinion and to the best of his information and explanation given to him, the said accounts give the information required by the Companies Act in the manner as required, and whether the financial statements give a true and fair view of the state of affairs of the business of the company and as to result of its operations.6. Right to receive notice and to attend general meeting [Section 146]: The auditor has right to attend all general meetings of the company held during the tenure. The following are the salient features with regard to his attending a general meeting. Q The right to receive notice and to attend meeting is applicable to general meeting and not to the meeting of the ‘Board of Directors’. Q The auditor is entitled to give his opinion on matters concerning him as an auditor. Merely stating the facts or giving explanation in the meeting will not relieve the auditor from his responsibility.7. Other rights under Section 146 of the Companies Act 2013: » Right to seek opinion from experts: Whenever and wherever the auditor feels necessary to take an opinion of an expert in a particular field, he has right to do so. » Right to receive remuneration: The auditor has a right to demand his remuneration after completion of his audit work.. Right of lien [ Section 128] : The term lien refers to the right of possession. The auditor enjoys this right over the books of clients if there is a free due. The guidelines to be followed while exercising this right is- Documents retained must belong to the client who owes the money. Documents must have come into possession of the auditor of the client. They must not have been received through irregular or illegal means. In case of a company client, they must be received on the authority of the ‘Board of Directors’. Such of the documents can be retained which are connected with the work on which fees have not been paid.9. Right to sign audit report [Section 145] :The auditor has a right as well as duty to sign the audit report of the company and the Balance Sheet & Profit and Loss Account including all the documents attached or annexed therewith.Duties of Auditors | 4 Introduction: The duties of an auditor are many and varied. He/ She must examine the original books of accounts, kept by the company to discover any inaccuracies or omissions therein, to examine the company’s Balance sheet and Profit and Loss Account, and report on the original books of accounts and the annual accounts to the members. The duties of auditors are stated below: I. Duties of Auditors [Section 143 (1) ] of the Companies Act, 2013: An auditor has ‘to inquire- i. Whether loans and advances are properly secured and terms on which they have been made are not prejudicial to the interests of the company or its members. ii, whether transactions which are represented merely by books entries are not prejudicial to the interests of the company.ii. vi Where the assets of the company as consists of shares, debentures and other securities have not been sold at a price less than that at which they were purchased by the company (except for investment or a banking company). Whether loans and advances made by the company have not been shown as deposits. Whether personal expenses have not been charged to revenue accounts. Whether cash has actually been received in respect of any shares shown in the books to have been allotted for cash; and if no cash has actually been so received, the position as stated in the books is correct, regular and is not misleading.Report to the Members [ Section 143 (2) ]: The primary duty of the auditor is to prepare and give a report to the members of the company- On the accounts examined by him. On the Balance Sheet and Profit and Loss Account; and On every other document declared by the Companies Act to be part of, or annexed to the Balance Sheet and Profit and Loss Account, which are laid before company in annual general meeting during his tenure of office.. Examination of Accounts [Section 143 (3) ] : The auditor has to state in his report- Whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of audit. Whether in his opinion, proper books of accounts, as required by the law, have been kept by the company so far as it appears from the examination of these books, and proper returns adequate for the purposes of audit have been received from the branches not visited by him. Whether the Company's Balance Sheet and Profit and Loss dealt with by the report are in agreement with the books of account and returns. Whether any director is disqualified from being appointed as director under section 164 (2).4, Reporting on True and Fair View {section 143}: The primary duty of the auditor is to examine the financial records of the company and to report whether the financial statements reflect the true and fair view of the state of affairs of the company. An auditor reports to the members of the company. He / She is not required to give any information or explanation individually to shareholders. * Financial Statements’ means the Balance Sheet, Profit and Loss Account and all the statements and documents annexed to the Balance Sheet and Profit and Loss Account of the company, laid before the general meeting.5. Duty to Give Reason for Qualification in Audit Report [Section 143 (4)] : If any matter as related to audit report is answered in the negative or with a qualification, the auditor's report must state the reason for the same. 6. Duty to Comply with Auditing Standards [Section 143 (9)]: Every auditor shall comply with the’ Auditing Standards’. 7. Duty to Sign Audit Report [Section 145]: The person appointed as an auditor of the company shall sign the auditor's report or sign or certify any other document and qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company mentioned in the auditor's report which shall be read before the company in general meeting and shall be open to inspection by any member of the company.Duty to Attend General Meeting [Section 146]: All notices and other communications relating to, any general meeting shall be forwarded to the auditor of the company. The auditor has right to attend all general meetings of the company held during the tenure. Other Duties of the Auditor: The auditor should be tactful and honest, and must not allow himself to be influenced by others in the discharge of his/her duties, The auditor must make himself fully acquainted with his duties under the Articles of Association and the Companies Act, 2013. The auditor should assist the investigating inspector (appointed for specific purpose to investigate) in every way while they are investigating the affairs of the company.The auditor has to certify the contents of statutory report in accordance with section, as regards: The number of shares which have been allotted by the company whether against cash or consideration other than cash, The total amount of cash received by the company in respect of all the shares allotted and the payment of cash made out of the money so collected. In case of existing company issues a prospectus, it should contain a statement of profits and the losses for the last five years showing the state of dividends paid each year and a statement of assets and liabilities of the company. It is the duty of the auditor to certify all these statement. The auditor has to submit a report on ‘money deposited by the public’.vii. The auditor should obtain the information and express his opinion: Whether loans have been properly secured or not. a Whether the shares, debentures and other securities have been sold at less than the purchase value. Q Whether personal expenses have been debited to the revenue account of the company to expose improper payment. vii’ According to press release of the Company Law Department of the Government of India, “ It was their (auditors) duty to comment on all such violations of the law or sound accounting practices as might reasonably be expected directly or indirectly the fortunes of the company accounts”. ** The statutory duties of an auditor cannot be restricted either by the director(s) of the company or by the Articles of the Association of the company.Liabilities of an Auditor If auditor fails to perform his duties in accordance with the provisions of the Companies Act, he/ she is held liable. Liability under Common Law: i. Civil liability for professional negligence ii Civil liability for negligence towards third parties. Apart from liability under common law, the statutory liabilities of an auditor could be either Civil or Criminal. Civil Liability: An auditor may be held liable to the company for negligence where loss is caused to the company due to the failure of the auditor to perform his/her duties with reasonable care and skill. The auditor is also liable for: i Breach of trust regarding any money or property of the company, or i, Breach of duty.Criminal Liability: An auditor is responsible for the destruction, disfigurement, alteration, falsification or fraudulent concealment of any books, papers or documents belonging to the company with an intent to defraud or deceive; and also where he/she makes intentionally any false statement in any report or document prepared by him. Criminal liability of an auditor may extend to imprisonment and / or fine at the discretion of the court.